July 01, 2015 - 3:33pm EST by
2015 2016
Price: 7.99 EPS 1.00 1.20
Shares Out. (in M): 22 P/E 8.0 6.7
Market Cap (in $M): 176 P/FCF 6.2 5.2
Net Debt (in $M): 119 EBIT 36 41
TEV ($): 295 TEV/EBIT 8.2 7.2

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POLYTEC HOLDING AG (“POLYTEC”, or the “Company”) was written up a little over a year ago by jordash111.  The stock today trades near where it did at the time of that write-up, having initially traded off by 25% following the write-up, and subsequently retracing that loss.  Although the trajectory of jordash111’s projected earnings acceleration may have been optimistic, the earnings power of the business is still very much intact.  Moreover, there have been several meaningful favorable corporate developments in the interim, including a small acquisition (with respect to purchase price) that holds significant promise, as well as the reintegration of the Company’s real estate.

Today, POLYTEC provides an investor with an ability to purchase a business with increasingly attractive tailwinds, improving returns on capital, an enhanced competitive position, and significant inside ownership for roughly 8x current year EPS (€1.00/shr).  This multiple is reasonably attractive in its own right; however, the multiple is materially overstated based on the Company’s medium-term earnings power.  With an expected €1.60+ of EPS within the next couple of years, the P/E multiple drops to 5x.

POLYTEC is a European-based provider of injection-molded and fiber-reinforced plastic parts, primarily to the automotive and commercial vehicle markets.  Representative products include both under-hood functional parts (cylinder head covers, oil pans, engine covers, and intake systems) as well as exterior design elements (roofs, spoilers, trunk lids, and bumpers).  The Company’s five largest customers are Volkswagen, BMW, Daimler, Volvo, and Jaguar.

POLYTEC was founded in 1986 by current Chairman and CEO Friedrich Huemer.  Starting from a single 400 square meter facility in Austria, Mr. Huemer built the business through a series of M&A transactions into a pan-European presence with over €1bn in sales by 2008.  This M&A program culminated with the debt-financed 2008 purchase of the Peguform Group, a transformative acquisition which roughly tripled the Company’s revenue base.  The Peguform acquisition was particularly ill-timed given the severe, prolonged downturn which hit the global automotive industry in late 2008, and it put POLYTEC into a highly stressed financial condition.  As a result, POLYTEC spent the years subsequent to 2008 eschewing M&A, focusing instead on rationalizing the existing manufacturing footprint and putting itself back on a firm financial footing.

There are several trends favoring POLYTEC’s business.  European automotive manufacturing activity has finally begun to demonstrate consistent growth.  While the U.S. automotive industry bounced back strongly from its nadir in 2009, the European light vehicle market not only bottomed much later (in 2013), but has been recovering much more slowly.  This difference in trajectory can be ascribed to the relative weakness of the European recovery versus that in the U.S.; however, the ability of European drivers to extend the functional lives of their existing vehicles is finite.  Vehicle replacement needs will eventually become necessary largely independent of overall economic conditions, increasing the likelihood of a sustainable growth path for the industry.  POLYTEC’s products also benefit from vehicle manufacturers’ increasing focus on fuel efficiency.  Manufacturers continue to utilize an increasing percentage of plastic and composite components in their vehicles, as these materials reduce weight and improve fuel economy versus ferrous metal alternatives.

Although POLYTEC has remained consistently profitable since 2009, the aforementioned multi-year rationalization program has led to reported financials that appear to show a business with a declining top line and stagnant profitability.  The reality, though, is more favorable.  Asset divestitures have driven the revenue declines, while multi-year restructuring actions have weighed on profitability.  This repositioning is now mostly behind the Company, and today POLYTEC has a healthy core automotive business with improving underlying demand trends and significant unused manufacturing capacity – a combination which should lead to significantly enhanced profitability going forward as a result of positive operating leverage.

The Company’s much-improved balance sheet has also put it in a position to once again consider small, value-enhancing acquisitions.  In this vein, during the 4th quarter of 2014 POLYTEC purchased the plastics manufacturing operations of the voestalpine Group (“voestalpine”), a diversified manufacturer of (primarily) steel products.  The benefits of this acquisition are multi-fold.  Strategically, the acquisition enhances POLYTEC’s capabilities in fiber-reinforced composites and further entrenches them with both BMW and Daimler.  From a financial perspective, POLYTEC paid just €17mm for the plants, which generate approximately €120mm in annual revenue.  At POLYTEC’s trailing 4% operating income margin (itself materially depressed vis-à-vis longer-term targets), this represents a pro forma purchase multiple of 4x a rough estimate of the acquisition’s likely near-term operating income.  It is important to note that this acquisition, the first of any size since POLYTEC’s restructuring was initiated in 2009, does not represent a return to the transformative (and risky) M&A activity of years past.  Company management took important lessons away from the difficulties it navigated post-2008, and is focused on reaching its ultimate goals through small, discrete steps with minimal risk.

A second recent transaction of note has been the financial reintegration of the real estate underlying many of the Company’s plants.  POLYTEC was LBOed in 2000 by Capvis, a Swiss private equity manager.  Following a series of transactions, Capvis ended up owning 2/3 of the business, with the Huemer family holding the balance (the Huemer family continues to own 27% of the Company today).  As part of the original transaction, the real estate was fully retained by the Huemer family at the behest of Capvis.  In order to incent the Huemer family to agree to this structure, favorable (to Huemer) triple net leases were put into place with built-in inflation escalators.  Capvis exited its investment through the Company’s IPO in 2006, but the related-party real estate agreement remained in place.  Understandably, this conflict was a thorn in the side of many of the Company’s public shareholders.  So, in 1Q 2015 POLYTEC repurchased the properties from the Huemer family.  The transaction was done at the lower end of a valuation range that had been provided by a third party (€87mm).  This reintegration will increase EBITDA by roughly €8mm, EBIT by roughly €5mm, and should be accretive to earnings by at least €0.10/shr.

Prior to the two transactions detailed above, POLYTEC management had set an intermediate-term (2017-19) target of €600-650mm in revenue (6%ish CAGR) and 7-8% operating margins.  The bottom end of these targets implies €42mm in operating income.  The voestalpine acquisition could conceivably add another €8mm in operating income (€120mm rev @ 7% margin), and the real estate reintegration an additional €5mm.  This yields a pro forma EBIT of €55mm.  €6mm of interest expense (above current run-rate), a 25% tax rate, and 22mm shrs yields over €1.65 in potential medium-term EPS.  Realization of this EPS power will, of course, take time.  My expectations are for the Company to deliver roughly €1.00 in EPS for 2015, still a nice bump from the €0.60–0.65/share that the Company has delivered for each of the past two years.  1Q 2015 showed good progress, with organic top line growth of >7% augmented by the contribution from the voestalpine acquisition.  Profitability was significantly improved as well.  Both gross and operating margins were the highest that the Company has delivered in several years.

All in, I feel that 8x current year EPS declining to 5x a few years out is a compelling multiple for a business which is exiting a demand trough, is showing marked improvement in its underlying fundamentals, has a heavily invested CEO, and is becoming increasingly important to its customers’ fortunes.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Revaluation as EPS accelerates as a result of :

   * Accretion from voestalpine acquisition

   * Accretion from re-integration of real estate holdings

   * Continued organic growth/ongoing improvement in European light vehicle market

Enhanced investor interest as result of elimination of related-party real estate deals

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